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April '17

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P R I N T W E A R A P R I L 2 0 1 7
Vince DiCecco is a dynamic and sought-after seminar
speaker and author with a unique perspective on busi-
ness development and management subjects, primarily
in the decorated and promotional apparel industries.
With over 20 years of experience in sales, marketing,
and training, he is presently an independent consultant
to various apparel decorating businesses looking to im-
prove profitability and sharpen their competitive edge. Visit his new website at
www.ypbt.com, and send email to vince@ypbt.com.
YOUR PERSONAL BUSINESS TRAINER B Y V I N C E D I C E C C O
Measuring Your Business's Cash-Management Acumen
Go with the Flow (Ratio)
I
trust you're familiar with your business's consolidated bal-
ance sheet. Your accountant or accounting software should
provide you with this valuable financial statement from
time to time. But have you ever wondered what it can tell you
about how your company manages its money? Before it gets filed
away, consider becoming familiar with flow ratio.
Flow ratio offers a neat and simple way to assess how well any
company's management team is making that "vision thing" a re-
ality. But, don't consider this ratio to be the end-all, be-all of
fiscal indicators. When properly interpreted, it certainly can help
identify whether your business needs to tighten up its cash-flow
practices.
Let's define it, run some numbers, and see if understanding
the trend of your flow ratio can help make your company more
profitable and successful.
A SIMPLE CALCULATION
The flow ratio measures ebb and flow of goods and cash in and out
of a business. T-shirts get ordered, printed, and shipped, and cash
receipts roll in. Sounds simple, right? The beauty of the calculation
is that any school-aged child who can subtract and divide is able to
figure out your flow ratio.
Here's the formula: Flow Ratio = (Current Assets – Cash)
÷ (Cur-
rent Liabilities – Short-Term Debt)
Cash, for this purpose, is made up of cash and its equivalents, mar-
ketable securities, and short-term investments.
Short-term debt is determined to be notes pay-
able and the portion of long-term debt that is
currently due.
When you take a closer look at your balance
sheet, you should see your current assets are
comprised of cash, accounts receivables, and
inventories. There may be some "other" items,
such as prepaid taxes and expenses, but that to-
tal should be relatively small, so I've set it aside
for the time being. Current liabilities are largely
made up of short-term debt, accounts payable,
and accrued expenses.
Let's see what the flow ratio is for a fictitious
company that happens to make and market
branded activewear in our industry. To begin, its
consolidated balance sheet (in thousands) looks
like the chart to the right.
Is this good? Is this company in trouble? Let's
apply some logic to these numbers and find out.
WHEN IS AN ASSET NOT A GOOD THING?
By subtracting cash from current assets, we are drawing focus on two
components over which management has great influence: invento-
ries and accounts receivable. But, are these really assets?
A high inventory count is an indication that there's plenty of stuff
sitting on warehouse shelves or moving around the shop floor as raw
materials and works-in-progress—stuff that is not bringing in any
money yet.
When a company has a substantial amount of money due from
its customers, it could be an indication that its credit and collection
practices need attention. Why would any business deliver goods or
render services and not bird-dog payment for said products boggles
my mind. Could it be that it is extending payment terms to less-
than-creditworthy companies?
December 31 December 31
2016 2015
CURRENT ASSETS:
Cash and cash equivalents $62,000 -0-
Accounts receivable $54,800 $79,600
Inventories $149,700 $203,750
Current Assets $266,500 $283,350
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $82,000 $81,200
Income taxes payable $3,000 $3,100
Current portion of long-term debt $6,000 $6,200
Current Liabilities $91,000 $90,500
Using the December 2016 data, the company's flow ratio is 2.41:
$266,500
– 62,000 $204,500
Flow Ratio =
_______________________
=
_______________
= 2.41
$91,000
– 6,000 $85,000